Intel Overview
Intel Corporation, the world’s largest semiconductor company and primary supplier of microprocessors and chipsets, is gradually reducing its dependence on the PC-centric business by moving into data-centric businesses — such as AI and autonomous driving.
In fact, its data-centric businesses accounted for 48.3% of revenues in fiscal 2019. This underscores the fact that the company’s data-centric businesses are helping it generate revenues close to what it generates from the PC business. The contribution of data-centric businesses to the total revenues has grown gradually over the past five years and should become significant in the near future.
Nevertheless, the company continues to maintain its dominant market share for microprocessors in both consumer and enterprise markets.
Intel generated $71.97 billion in revenues in 2019. Data Center Group (DCG), Internet of Things Group (IOTG), Mobileye, Non-Volatile memory solutions group (NSG) and Programmable Solutions Group (PSG) and All Other business units form the crux of Intel’s data-centric business model.
DCG accounted for 33% of revenues in 2019. The segment deals with servers, workstations and other products for the cloud, enterprise, and communication infrastructure market.
IOTG offers high-performance compute (HPC) solutions and embedded applications. The segment accounted for 5% of 2019 revenues.
NSG contributed 6% to revenues in 2019. The segment primarily offers memory and storage products like Optane and 3D NAND technology, primarily utilizing SSDs.
PSG segment that accounted for 3% of revenues offers programmable semiconductors, primarily FPGAs and structured ASICs.
Mobileye contributed 1% to revenues in 2019. This segment engages in developing computer vision and machine learning-based sensing, data analysis, localization, mapping, and driving policy technology for ADAS and autonomous driving.
Client Computing Group (CCG), which accounted for 52% of 2019 revenues, is the company’s largest segment. The company is the dominant provider of computer CPUs. It began shipping 10 nanometer (nm) based 10th generation processors (previously referred to as Ice Lake) in 2019.
Reasons To Buy Intel
- Evolving Management Strategy. The management strategy has evolved with the changing times. The primary focus area is the data centre and cloud, where Intel is doing everything possible to maintain its market share and profitability. Supporting this is an ongoing investment in the Internet of Things (IoT) and non-volatile memory/storage (memory is associated with processing speeds and it also helps increase penetration at customers). Also, while the focus was earlier on making the best computing chips and generating industry-leading margins from them, Intel now prefers to focus on a product range targeting different segments of the market. Management says that the higher-end business in more developed economies continues to look up, but the new strategy should help it get into many more device categories, where Intel products will continue to enjoy a premium based on performance and cost of ownership.
- Growing Demand within the Data-Centre Business. I am particularly optimistic about the data centre business. The drive to lower-cost computing devices is increasing the pressure on servers that are taking the load off these devices. As cloud storage is ever-increasing, there is a demand for a new breed of chips that are more efficient in terms of cost and energy. Intel has made advancements in this area and it is now offering more integrated solutions that will likely be competitive on a cost per watt basis. The company’s investments in field-programmable gate array (FPGA) for acceleration (dramatically increases performances at low power) and memory to reduce latency and increase speeds are helping it develop custom solutions for big players. Adding Altera and eASIC is also aiding it in strengthening position in the networking segment. Therefore, cloud computing, virtualization, enterprise upgrades and new products (Xeon Scalable) should all drive sales in 2020.
- Increased IoT Capabilities and Expansion. Intel may have been late to the mobile market, but it wasted no time getting into the IoT. Market research from Gartner, IDC and other independent firms say that this market will see strong growth over the next few years. Intel’s renewed focus on supplying not just chips but associated hardware puts it in a position of strength here. The Altera acquisition should also help. The biggest positive in this respect is the nascent stage of the market, which indicates the potential for expanding exponentially. The company generated $3.82 billion from IoT in 2019 (it mainly focuses on retail, transport, industrial and domestic segments). The products it has showcased thus far look good and Intel continues to introduce new products. It is also making strategic acquisitions (like Recon) to build out the portfolio and further strengthen its position in this emerging market. The company is well-positioned to tap the tremendous scope for growth because it is at the forefront of leading-edge processing technology, which will increasingly be required to generate sufficient volumes at low cost.
- Intel’s Non-Volatile Memory Business Is Poised To Take Off. While NVM has broad application across markets, the company is primarily targeting enterprise/data centre customers to drive the penetration of this high-margin segment. The company tied up with Micron to develop new memory technologies back in 2006. In 2015, this collaboration yielded the densest 3D NAND technology, which is noteworthy. In March 2018, Intel launched Optane, its NVM product based on 3D XPoint technology. Per Intel, Optane is the most responsive data centre SSD with lower latency than all the fastest NAND flash-based competitors. Also, Intel took forward its long-standing relationship with Micron by updating the terms of their 3D XPoint joint development partnership. The alliance resulted in the development of non-volatile memory that is must faster and more reliable/endurable than NAND.
Intel Q2 Earnings Call
- An Improving Trend in PC Shipments is Anticipated. Per Gartner’s preliminary data, PC shipments in second-quarter 2020 improved 2.8% year over year to 64.8 million units. Going by the IDC report, shipments grew 11.2% on a year-over-year basis and totalled 72.3 million in the period under review. Moreover, an improving trend in PC shipments driven by work-from-home and online learning wave is likely to positively impact PC-makers, which bodes well for Intel’s growth prospects.
- Intel’s Acquisition of Israel-based Mobileye, an autonomous vehicle technology provider is significantly positive in my view. A 0 to 1 initiative by Intel and a true sleeping giant in my opinion. This acquisition will help the company rapidly penetrate the autonomous car technology market, currently dominated by the likes of NVIDIA and Qualcomm. With the buyout, Intel will now have access to Mobileye’s technologies related to cameras, in-car networking, sensor-chips, roadway mapping, cloud software, machine learning and data management. This will boost its customer base going forward. In 2019, Mobileye contributed $879 million to total revenues.
Mobileye’s Autonomous Vehicle
Reasons To Sell Intel
- Intensifying Competition in the Server, Storage and Networking Markets. The server segment has always generated strong margins and Intel’s powerful architecture has always been considered supreme. However, ARM is posing a challenge in the fast-growing microserver segment and its designs have seen adoption at several Intel competitors. The NVIDIA alliance with IBM is likely to increase competition in the HPC accelerator segment and is another indication of competitors teaming up against Intel. The company has been also facing stiff competition from AMD in the commercial PC market.
- Delay in 7 nm Process-Based Chips is a Major Concern. The company has detected a defect mode in 7 nm process, which caused yield degradation. Notably, Intel’s chips utilize process technologies that are designed in-house. Moreover, the company anticipates a decline in the PC total addressable market (TAM) in the second half of 2020, as weakness in the economy is likely to offset the spike in coronavirus-led demand, which remains a major concern. Intel anticipates the release of data centre GPU design, Ponte Vecchio, in late 2021 or early 2022. The chipmaker now expects initial production shipments of first Intel-based 7 nm client CPU in late 2022 or early 2023. Moreover, initial production shipments of Intel’s first in house-based 7-nm data centre CPU design is now scheduled in the first half of 2023. Meanwhile, AMD is currently leveraging Taiwan Semiconductor Manufacturing Company’s 7 nm process technology, which is enabling it to deliver its advanced 7 nm chips faster to market. Further, AMD aims to deliver “Zen 4” core architecture, which is “currently in design” utilizing advanced 5 nm process technology. This is a major headwind for Intel. Intense competition is likely to lead to pricing pressure and limit margin expansion at least in the near term.
- Tariffs Owing to the Trade War and the Coronavirus Outbreak is Anticipated to Negatively Impact Growth Prospects. The uncertainty over the economic impact of coronavirus crisis has affected investors’ confidence and is likely to remain an overhang on the company’s performance. Intel anticipates impending global recession is to weigh on IOTG end markets, especially retail and industrial. Moreover, lower automotive production due to lockdowns is a concern for Mobileye.
Intel’s Earnings and Revenue
Intel Q2 Earnings Top Estimates, DCG Growth Aids Revenues
Intel reported second-quarter 2020 non-GAAP earnings of $1.23 per share. The bottom line improved 16% from the year-ago quarter.
Revenues totalled $19.728 billion. The top line increased 20% year over year. Q2 Operating Margin 31%, flat YoY.
Segment Revenue Details
Client Computing Group or CCG (48.1% of total revenues) represents Intel’s PC-centric business. The company bundles PCs, notebooks, 2-in-1s, tablets and other computing devices under the Client segment, which aids comparison with the PC market numbers provided by IDC and Gartner.
Revenues were up 7% on a year-over-year basis to $9.496 billion. Higher wi-fi and modem sales and solid notebook demand drove the top line despite weakness in desktop volumes.
Notably, Platform revenues increased 4% year over year to $8.229 billion. Adjacencies revenues improved 38% from the year-ago quarter to $1.267 billion. Notably, CCG adjacencies include modems, connected home products, wireless communications and wired connectivity.
While notebook platform volumes increased 14% year over year, desktop platform volumes declined 14%.
PC volumes grew 2% on a year-over-year basis. Further, Notebook’s average selling price (ASP) improved 3% year over year, while Desktop ASP increased 3%.
Intel anticipates strong momentum in its first 10-nanometer (nm) mobile CPU — Ice Lake.
Notably, Intel is adding wafer capacity to boost PC unit volumes in a bid to meet market demand.
Data Center Group or DCG (36.1%) revenues improved 43% year over year to $7.117 billion. A strong mix of high-performance second-gen Xeon Scalable processors and solid demand for Cloud service providers (CSP) and networking solutions led to the upside.
Platform revenues were up 36% year over year to $6.181 billion. Adjacencies soared 118% from the year-ago quarter to $936 million on solid uptake of 5G networking solutions.
DCG Platform unit volumes were up 29% year over year, while ASP rose 5%.
CSP revenues advanced 47% year over year. Further, revenues from Communication service provider increased 44%. Revenues from Enterprise & Government grew 34%.
Internet of Things Group or IOTG revenues declined 32% from the year-ago quarter to $670 million. The coronavirus crisis-induced weakness in retail, vison and industrial end markets led to YoY decline.
Mobileye revenues of $146 million fell 27% on a year-over-year basis, on account of lower automotive production due to lockdowns. However, increasing proliferation of ADAS and ramp of new EyeQ programs limited revenue decline.
Total Internet of Things revenues (4.1% of total revenues), comprising IOTG and Mobileye, declined 31.3% year over year to $816 million.
Non-Volatile Memory Solutions Group or NSG (8.4%) revenues surged 76.5% year over year to $1.659 billion on improvement in NAND pricing trends, which led to higher ASPs, and Optane bit growth.
Programmable Solutions Group or PSG (2.5%) revenues grew 2.5% from the year-ago quarter to $501 million, driven by strength across cloud vertical. However, sluggish demand across communications and embedded segments hindered growth.
Intel also has a residual segment, All Other (0.7%), which includes results of operations from other adjustments. The segment reported revenues of $139 million, up 113.8% year over year.
Notably, DCG, IOTG, NSG, PSG, Mobileye and All Other business units form the crux of Intel’s data-centric business model. Revenues from the data-centric businesses were $10.232 billion (51.9% of total revenues), up 34% collectively on a year-over-year basis.
Margins (Non-GAAP)
Gross margin in the reported quarter was 54.8%, which contracted 6.8% on a YoY basis. Increase in product costs and unfavourable sales mix such as the rapid adoption of margin dilutive 5G ASIC products led to the decline.
Research & development (R&D) expenses and Marketing, General & Administrative (MG&A) expenses decreased 5% year over year to $4.751 billion.
Operating income surged to $6.058 billion, 18% on a year over year basis.
Operating margin contracted to 30.7%. The negative impact of lower gross margin offset gains from lower spending.
Segment Operating Margin Details
Segment operating margin was 28.9%, which expanded by 0.9% on a year-over-year basis.
CCG operating margin was 30%, compared with the year-ago quarter’s 42.3%. This is due to the ramp-up of 10 nm products and the pre-PRQ reserves ahead of the launch of Tiger Lake processors in the third quarter. These factors more than offset gains from higher CCG revenue base.
DCG operating margin of 43.5% expanded 7.4% year over year driven by higher revenue base and a solid mix of high-end compute products.
IOTG operating income came in at $70 million, compared with operating income of $294 million in the year-ago quarter, owing to weakness across retail, vision and industrial end markets.
Mobileye operating loss of $4 million against operating income of $53 million in the year-ago quarter.
NSG group reported operating income of $322 million against operating loss of $284 million in the year-ago quarter.
PSG operating income of $80 million improved 53.8% from the year-ago quarter.
All Other segment reported a loss of $712 million compared with a loss of $1.035 billion reported in the year-ago quarter.
Balance Sheet
As of Jun 27, 2020, cash and cash equivalents, short-term investments and fixed-income trading asset balance were $13.53 billion compared with $20.8 billion as of Mar 28, 2020.
Total debt as of Jun 27, 2020, was $38.35 billion compared with $39.92 billion as of Mar 28, 2020.
In the second quarter, the company paid out dividends worth $1.41 billion. The company did not make any share repurchases during the reported quarter.
Markedly, on Mar 24, Intel filed 8K with the SEC, announcing that it is suspending stock repurchases temporarily on account of the COVID-19 crisis. Notably, in October 2019, Intel had announced plans to repurchase shares worth $20 billion over the next 15–18 months. The company has shares worth $19.7 billion remaining for repurchase as of Jun 27, 2020.
Guidance
For third-quarter 2020, Intel expects non-GAAP revenues of $18.2 billion, suggesting a decline of 5% year over year.
In the third quarter, both data-centric and PC-centric businesses are anticipated to decline in mid-single digits on a year-over-year basis.
The company anticipates a decline in the PC total addressable market (TAM) in the third quarter, as softness in desktop demand and weakness in the economy is likely to offset the spike in coronavirus-led demand.
Non-GAAP gross margin and operating margin is anticipated to be 57% and 30%, respectively. Gross margin is expected to be affected by the accelerated ramp-up of 10 nm products and decline in platform revenues.
Non-GAAP earnings are likely to be $1.10 per share.
For 2020, Intel now projects revenues of $75 billion and non-GAAP earnings per share to be $4.85.
Markedly, the company had earlier withdrawn guidance, citing business uncertainty and “limited visibility” about the coronavirus crisis.
Coronavirus crisis-led robust demand across mobile computing, cloud, and network infrastructure for 5G, verticals is a tailwind.
However, an impending global recession is likely to weigh on IOTG end markets, especially retail and industrial. Further, lower automotive production due to lockdowns is a concern for Mobileye. Also, sluggish data centre demand across enterprise and government end-markets remains a woe. Moreover, 7 nm delay is a headwind.
Long Term Outlook
Intel, much like any other stock, deserves a valuation based on it’s business model and customer satisfaction. The recent move from apple speaks to this, as the delays in chip shipping and releasing newer generations frustrates not only the public consumers but also the corporate customers.
Even though intel is posting good numbers, I expect this trend to be on a decline in CCG unless there are some big changes to within their products, as companies move to foundries and develop their own chips.
It’s a wise move by Intel to be moving away from the CCG space. I expect the company to be increasing their data centre capacity and its 5G capabilities.
With regards to Mobileye, Intel has acquired Moovit, a leading mobility-as-a-service solution company. Combining Mobileye’s ADAS and automated vehicle (AV) technologies with Moovit accelerates their ability to become a full-stack mobility provider and to truly revolutionize transportation, much like TESLA. Also, Intel has announced a significant design win with Ford. Design wins to date in 2020 include multiple new ADAS production programs representing a cumulative volume of over 20 million units.
Ther greatest asset Intel has is its ability to earn trust from a broad base of customers and lead collaborations within multiple industries. As long as intel focuses on these two main components, intel can not only be seen as a value company with great fundamentals but also a growth company with multiple vectors poised for innovation.
Summary
Intel second-quarter results reflect gains across both PC-centric and Data-centric domains. A robust mix of high-performance second-generation Xeon Scalable processors and solid demand from Cloud service providers aided growth. Strong momentum for 10 nanometer (nm) mobile CPU bodes well. Notably, the company provided encouraging 2020 guidance. Further, solid uptake of 5G networking solutions, higher Wi-Fi and modem sales and solid notebook demand, improvement in NAND pricing trends that led to higher ASPs, and Optane bit growth, remain tailwinds. However, declining PC total addressable market, and production delays pertaining to 7 nm ramp up remain concerns. Notably, shares of the company have underperformed in the year-to-date period. Also, coronavirus crisis-led weakness in retail, vison, automotive and industrial end markets is a headwind.
Referred Sources:
Intel Q2 2020 Results, Intel 2019 10-K, and predictions made by the Author’s understanding of the company.
Disclosures:
This report contains independent commentary to be used for informational purposes only. The analyst/author contributing to this report does not hold any shares of this stock at the time of writing. The analyst/author contributing to this report does not serve on the board of the company that issued this stock. Additionally, the analyst/author contributing to this report certify that the views expressed herein accurately reflect the analyst’s/author’s personal views as to the subject securities and issuers.
